QE2: Bernanke Might Still Be Able To Surprise Us

By Tiernan Ray

With the next round of Federal Reserve stimulus, QE2, almost upon us with next Tuesday and Wednesday’s FOMC meeting, I’d note a survey released yesterday by Jefferies & Co.’s chief financial economist, Ward McCarthy, of which the Fed Reserve requested a copy.

I noted yesterday the Fed Reserve sent out its own survey to dealers; this is completely separate, sent to Jefferies clients.

Jefferies conducted a similar survey a month ago, and the main difference since then is that out of the total 141 survey participants, the percentage of respondents who think the Fed will do some form of QE has jumped from roughly 70% to 96%.

More interesting is that a minority of people expect the Fed Reserve might go beyond buying Treasuries, and only 15% think the Treasury might buy more than a smidgeon of Treasuries of 20-year or greater maturity.

What that means is that if the Fed did buy more longer-dated Treasuries, or if it goes beyond Treasuries into other assets, it could surprise the market, perhaps in a good way.

“If the Fed wants to surprise in a beneficial way, there’s potential there,” McCarthy tells me. “A relatively low number of people feel the Fed would focus on the long end of curve, or that the Fed would buy any other types of credits aside from Treasuries.”

“So, if the Fed wanted to provide bit of a jolt, those are areas with potential.”

McCarthy himself is an “outlier”: He thinks it’s logical the Fed might take its proceeds from agency MBS and re-invest it back into MBS.

However, he admits his sense of logic runs against the fact that “The MBS market still appears to have difficulties with the prior QE,” as he puts it.

“It would certainly be a strong break with Fed precedent if they were to engage in credits that are even more distant from their normal asset purchases,” says McCarthy.

Add a Comment

We welcome thoughtful comments from readers. Please comply with our guidelines. Our blogs do not require the use of your real name.

Comment

There are 4 comments

OCTOBER 29, 2010 1:45 P.M.

ben bernanke wrote:

i caused the problems and now i should resign

OCTOBER 29, 2010 1:57 P.M.

Anonymous wrote:

With the prospect of deflation, Quantitative Easing by provoking portfolio-rebalancing might not provide enough support to stimulate new investment growth and to keep economic momentum progressing.

The Wall Street Challenger came up with the idea for expanding Quantitative Easing by doing portfolio-restructuring purchasing corporate bonds that boosts corporate finances. For that reason the Federal Reserve will expand the beneficial effects directly into the corporate financing environment.

Under this proposed policy, the Federal Reserve purchases short-term corporate bonds up to six months maturity. The purchase of corporate bonds it is not limited to highly-credit rated corporate bonds, but also includes low-grade corporate bonds.

The Feds choice is limited, by cutting out the stalled banking system and applying QE directly to businesses they have the best chance of creating a beneficial shock to the system and some measure of sustainable growth.

I wonder why buying Treasuries is the method the Fed chooses in order to inject money into the economy. One effect is to lower interest rates, but they are already low, and lenders seem to be sitting on their cash rather than increasing lending to businesses or consumers; thus I don't think that lowering interest rates will have a big benefit. Another effect is to put more money into the economy, however there are different parts of the economy, and the parts receiving the money from QE2 will be Treasury holders: mainly companies, institutions, and rich people who have more money than they need already, and who will likely not go out and spend any more they get. Some of the money will just go to speculation in commodities and assets around the world.

To boost the economy, wouldn't it be more effective to give money to all citizens, or to all poor people? The poorer people are, the greater the proportion of any incremental income they are likely to spend. The spending would go to food, clothes, rent, child care, and many services. This spending would directly increase retail and service spending, leading to hiring. Instead of chartering the Queen Elizabeth 2 for a round-the-world cruise, we need to hire a fleet of tugboats. What do you think?

OCTOBER 31, 2010 12:35 P.M.

shootpar2001 wrote:

How about the FED buying the preferreds of the banks? Higher payouts for the taxpayers, more liquiity to the system, a change that could spark the markets, something they already own under the TARP program...
Or is that too simple?

About Stocks To Watch

Earnings reports, corporate strategies and analyst insights are all part of what moves stocks, and they’re all covered by the Stocks to Watch blog. We also look at macro issues, investor sentiments and hidden trends that are affecting the market. Stocks to Watch gives you the full picture of the U.S. stock markets, all day long.

The blog is written by Ben Levisohn, a former stock trader who has covered financial markets for the Wall Street Journal, Bloomberg and BusinessWeek.